IHOP 2010 Annual Report Download - page 103

DineEquity, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Continued)
2. Basis of Presentation and Summary of Significant Accounting Policies (Continued)
The rental payments or receipts on those property leases that meet the capital lease criteria will
result in the recognition of interest expense or interest income and a reduction of capital lease
obligation or financing lease receivable. Capital lease obligations are amortized based on the
Company’s incremental borrowing rate and direct financing leases are amortized using the implicit
interest rate.
The lease term used for straight-line rent expense is calculated from the date the Company obtains
possession of the leased premises through the lease termination date. The Company expenses rent from
possession date through restaurant open date as expense. Once a restaurant opens for business, the
Company records straight-line rent over the lease term plus contingent rent to the extent it exceeded
the minimum rent obligation per the lease agreement. The Company uses a consistent lease term when
calculating depreciation of leasehold improvements, when determining straight-line rent expense and
when determining classification of its leases as either operating or capital. For leases that contain rent
escalations, the Company records the total rent payable during the lease term, as determined above, on
the straight-line basis over the term of the lease (including the rent holiday period beginning upon our
possession of the premises), and records the difference between the minimum rents paid and the
straight-line rent as a lease obligation. Certain leases contain provisions that require additional rental
payments based upon restaurant sales volume (‘‘contingent rent’’). Contingent rentals are accrued each
period as the liabilities are incurred, in addition to the straight-line rent expense noted above.
Certain lease agreements contain tenant improvement allowances, rent holidays and lease
premium, which are amortized over the shorter of the estimated useful life or lease term. For tenant
improvement allowances, the Company also records a deferred rent liability or an obligation in our
non-current liabilities on the consolidated balance sheets and amortizes the deferred rent over the term
of the lease as a reduction to company restaurant expenses in the consolidated statements of
operations.
Preopening Expenses
Expenditures related to the opening of new or relocated restaurants are charged to expense when
incurred.
Advertising
Franchise fees designated for IHOP’s national advertising fund and local marketing and advertising
cooperatives are recognized as revenue as the fees are earned and become receivables from the
franchisee in accordance with U.S. GAAP governing the accounting for franchise fee revenue. In
accordance with U.S. GAAP governing advertising costs, related advertising obligations are accrued and
the costs expensed at the same time the related revenue is recognized. Franchise fees designated for
Applebee’s national advertising fund and local advertising cooperatives constitute agency transactions
and are not recognized as revenues and expenses. In both cases, the advertising fees are recorded as a
liability against which specific costs are charged.
Advertising expense reflected in the consolidated statements of operations includes local marketing
advertising costs incurred by company-operated restaurants, contributions to the national advertising
fund made by Applebee’s company-operated restaurants and certain advertising costs incurred by the
Company to benefit future franchise operations. Costs of advertising are expensed either as incurred or
the first time the advertising takes place. Advertising expense included in company restaurant
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